An endless line of water that starts from a shallow stream, grows into a big river, and then flows into the ocean. That’s how former Deputy Prime Minister Vu Khoan described the progress made by Vietnam and South Korea in 2012, as they celebrated the 20th anniversary of the establishment of bilateral relations. Five years later, the “Pacific Miracle” - the development of Vietnam-South Korea relations over the past quarter of a century - is now considered stronger than ever.

Close friend

Coupled with the effects of the Vietnam-South Korea Foreign Trade Agreement that came into force at the end of 2015, together with opportunities not only in terms of manufacturing capacity but also in terms of a sizable domestic market, the 25th anniversary of Vietnam and South Korea’s diplomatic relations witnessed the latter capitalizing on these movements, with a focus on trade and investments being shifted from labor-intensive sectors such as garments and textiles to capital-intensive sectors such as electronics and finally, at present, to consumer goods and services. Bilateral trade jumped from $500 million in 1992 to $43.4 billion in 2016, while in terms of investment, according to the Ministry of Industry and Trade, South Korea has emerged as the largest foreign investor in Vietnam.

Reasons for the increase in foreign direct investment (FDI) from South Korean companies to Vietnam include its geographical proximity to China, its well-educated and highly-skilled yet inexpensive workforce, its potential for market growth based on rapid upswings in income and the economy, and business-friendly government policies, according to the Korea Trade-Investment Promotion Agency (KOTRA). With more than 5,600 South Korean companies having invested in Vietnam and promising exchanges and socioeconomic cooperation between the two countries in the years ahead, “Vietnam is set to become a business hub with easier access to neighboring markets than any other Southeast Asian country,” Director General of KOTRA Hanoi, Mr. Park Chul Ho, said.

Listed South Korean conglomerate the CJ Group is typical of what is called the “third wave” of South Korean investment in Vietnam. After entering the country in 1998, it now has a dozen member firms in the country, with business interests ranging from food processing to the production of fertilizer and feed and from TV shopping to film production and distribution. Last year, CJ pledged an additional $500 million worth of investment in the country, constituting the single largest investment by any South Korean firm in Vietnam during the year.

The most-high profile South Korean investor in Vietnam, however, is Samsung, which has almost single-handedly helped turn the country into an electronics manufacturing hub, with over $17 billion in investment. From just an ordinary TV manufacturing factory, Samsung’s plants moved into the northern provinces of Bac Ninh and Thai Nguyen and also Ho Chi Minh City, manufacturing mobile phones, displays, batteries, and household electronic products. It is now Vietnam’s largest exporter, shipping about $39.9 billion worth of electronics in 2016 and accounting for about 22.7 per cent of the country’s total shipments.

LG Electronics has also invested heavily in Vietnam, opening a new production base in the northern port city of Hai Phong that will manufacture smartphones and televisions. The company has stated that it plans to spend $1.5 billion on the complex through 2028. The involvement of companies such as Samsung and LG have helped persuade suppliers to those firms to invest in Vietnam as well. For example, Seoul Semiconductor Co. was granted a license in 2016 to build a semiconductor production factory in northern Vietnam, constituting an investment of around $300 million.

Cross-cultural understanding

A dozen South Korean firms told VET that Vietnam still has issues with transparency. Regulations are frequently kept vague or are contradictory, exposing businesses seeking permits or approvals to the risk of bribery and corruption. Legal remedy in the face of disputes with local partners is patchy, with the judiciary viewed by some South Korean businesses as being susceptible to bribery. Identifying a suitable local partner to help navigate the complex business environment can prove equally challenging, with reliable information being scarce in the public domain.

One South Korean multinational conglomerate cited a recent project conducted by the US’s risk consulting firm Kroll for a client during its proposed investment into a Vietnamese manufacturer as an example. The focus of the assignment was to provide the client with a detailed understanding of the transaction under consideration, including information around asset valuations and the reason that the target was seeking strategic investment. The investigation highlighted several key risks, ranging from potentially overvalued assets to potential political influence on the company’s board as well as the risk of fraud or corruption at subsidiaries.

Regarding partnerships, President and CEO of the CJ Group Vietnam, Mr. Chang Bok Sang, told VET that, at times, South Korean companies face a host of difficulties and uncertainties, but respecting each other’s culture and setting up mutual trust is key in resolving problems. “Typically, once South Korean businesses set business goals, they will invest heavily to achieve those goals,” he said. “In contrast, some Vietnamese businesses want stability in investment and growth.” He added that differences in business goals is one of the obstacles the group has encountered.

Another issue, however, comes from a lack of cross-cultural understanding. Business negotiations with South Korean counterparts, with a little bit of science and art involved, are much more complex than domestic negotiations, a Vietnamese businessman with experience dealing with South Korean firms told VET. Protocol is extremely important. Vietnamese businesses following the rules of etiquette will help their South Korean counterparts decide they are trustworthy. “Your South Korean partners will expect negotiations to take a long time, and if circumstances change, your partner will expect to renegotiate,” the Vietnamese businessman said, adding that for South Korean businesses, relationships are considered more important than the bottom line.

As most South Korean enterprises focus on full statistical data, comprehensive management systems such as enterprise resource planning (ERP), and detailed breakdowns of each business and function, it is crucial for Vietnamese partners to be fully equipped with such information, especially at a time when Industry 4.0 is set to drastically impact on business competitiveness, President of External Relations at Lotte Vietnam, Mr. Jong Kook Lee, told VET. “Understanding this will make it much easier for Vietnamese enterprises to cooperate with South Korean businesses and upscale the already sophisticated bilateral relationship,” he said.

Benefits to both

Built in the style of the traditional Vietnamese outfit, the “ao dai”, and opened in 2014, the $400 million Lotte Center Hanoi skyscraper, which houses outlets of Lotte Group companies such as Lotte Mart and the Lotte department store, is recognized as a symbol of friendship and the result of long-standing bilateral commercial relations between Vietnam and South Korea. The large-scale commercial complex, which had an unprecedented record of zero accidents during its 18 million hours of construction, underlines Lotte’s dedication and commitment to contributing to Vietnam’s economic development. “Unlike other foreign export and manufacturing-oriented companies that come and go, our buildings cannot be moved elsewhere,” Mr. Lee said. “We come to permanently stay and help the government develop the economy.”

Determining Vietnam as a market of potential, Lotte entered Vietnam in 1998 with its fast food chain Lotteria. It has now established a strong foothold in various sectors, from real estate, retail, and distribution to commerce and IT, while deeply understanding the importance of startups for a business and the economy as a whole. “Lotte has only encountered minor difficulties with Vietnamese businesses, and we have always helped our partners to transform themselves through different affiliates, using our multinational experience,” Mr. Lee added.

Having witnessed many mergers and acquisitions (M&As), strategic alliances, and joint venture investments between Vietnamese and South Korean companies, Mr. Chang believes that through this cooperation, South Korean companies can reduce risks with support from their Vietnamese partner, who fully understands market information, regulations, and legal institutions and the consumption habits of Vietnamese people, while conversely, Vietnamese enterprises can take advantage of investment capital, advanced technology, and overseas networks from their South Korean partner.

Mr. Chang believes Vietnam will continue to be the destination of South Korean investment in the time to come. “With Vietnam being recognized as a new base camp for cooperation in manufacturing and processing and penetrating into the huge Southeast Asian market and other counties that are to open up markets under trade agreements, I absolutely believe that Vietnamese enterprises can truly become a reliable business partner of South Korean enterprises, on a win-win basis,” Mr. Chang said.